This article originally appeared on The DIV-Net September 26, 2008.

The abbreviation DRIP stands for dividend reinvestment plans. Drips are a nice low cost way to purchase dividend stocks and build a stock portfolio. These programs allow investors to purchase shares in two ways either through reinvesting dividends or with optional cash payments that can be sent to the companies you want to invest in. One benefit of drips is that they allow dividend reinvestment in partial shares. Another benefit of other drips is that some allow reinvesting your dividends by purchasing shares at a discount to the market price. Two such companies that I am aware of that do this are ACAS and NNN. Below you can also check my analysis of ACAS and NNN.

One of the issues with drips is that in order to participate in the DRIP you must already have purchased one share of the company stock. Some companies have overcome that hurdle for shareholders by letting people make a direct purchase in their stock. Stocks like GE or XOM are good examples of direct purchase plans with reinvestment plans.

Another problem with drips however is that you do not have the execution speed like you do when you purchase shares through a broker. If you want to buy or sell shares at the current market price, you can’t do it. In addition to that, despite the fact most drip plans allow charge low or no fees for purchasing additional shares or reinvesting your dividends, most drips have high initial set-up fees.

Another issue that I have with drips is availability. Not all companies offer drips, so you might have to use a stock broker after all.

From a tax perspective drip Investors must track their cost of shares to be used to calculate capital gains tax when shares are sold. In addition to that very few dividend reinvestment plans allow you to hold stocks in an IRA DRIP, which allows for a tax free compounding of your dividends.